Tarkett: Global Leader in Flooring Products Production & Distribution

Sebastien Lemonnier presented his in-depth investment thesis on Tarkett (France: TKTT) at Best Ideas 2015.

Tarkett is a recent French IPO, c. €1.1bn market capitalisation, that initially benefits solid fundamental strengths to become a very much appreciated stock by investors but only due to tough to predict external factors, has been a falling stock the last 6-9 months to become now an attractive contrarian investment case for the mid & long term.

Global leader in flooring products production & distribution with a broad range of products (vinyl, linoleum, carpet, wood laminate, rubber… and sport applications), the group also benefits from a balanced & relative resilient end business across c. 100 countries globally (36% North America, 35 CIS & others, 29% EMEA). Renovation accounts for 80% of sales, with a 50/50 mix between residential & commercial. By nature, it is very much a local business with product, brand and distribution specificities; thus price competition is limited, cost structure is mostly variable and it is a low capital intensive business (capex c. 3% of sales), all leading to relative robust FCF & margins over the cycle and sound returns. Fundamentally the group benefits from strong position in niches, local & global competitive edges, a healthy FCF & B/S to drive bolt on acquisitions together with a disciplined capital allocation and management who shared minority shareholder interests.

Despite good company results, some further rationalisation and attractive bolt on acquisitions, the stock is down c. 40% the last 9 months. Main explanation relates to geopolitical situation with Russia as the group were used to generate more than 35-40% its profits there. Despite the tough environment in Russia, the group is not doing too bad as they benefits from more than 50% market share being the only local producer (also consider as a Russian company for Russian consumer).

Post analyst sharp earnings revision the last 6 months, we consider valuation looks attractive both in absolute terms and based on back to normalised earnings situation. FCF yield is above 7.5% & EV/EBIT c. 8x 2015 with margins around 7% and ROCE higher than 11-12%. Being even much more aggressive than recent analyst earnings revision, putting an extreme nil valuation to the Russian franchise with no profit contribution, 2016 valuation would be @ 10.4x EBIT (very much depressed earnings).

Consequently using a back to normalised profits (but being cautious on Russian situation), our estimates outline a potential @ least 40-50% upside the next 2 years applying a 9.5x EV/EBIT over the cycle.

About the instructor:

Sebastien joined Mansartis, the Paris-based family-run financial services group, in 2014 after 10 years of experience in European equities, both as financial analyst and since 2006 as fund manager. Before joining Mansartis, Sebastien had been managing the Tocqueville Value Europe fund. Sebastien holds a Masters Degree in Financial Management from Panthéon-Sorbonne Paris.

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